Multiple Dwellings Relief (MRD) – Part 1, the basics
One of the hot topics around SDLT these days is MDR which I intend to deal with in 3 articles. This week Part 1 outlines the main issues. Next week Part 2 covers what is a dwelling for MDR and how it applies to annexes. Part 3 covers MDR and building projects and also the main exclusions and post completion events which trigger clawback.
Many conveyancers either don’t know about MDR or being uncertain, are afraid to claim it. Claims farmers are said to be circling. Even mainstream accountants are reviewing their client’s purchases to see if legitimate MDR claims have been missed.
Before claiming MDR, conveyancers need to check whether alternatives give a better result (see later).
MDR is available where two or more dwellings are purchased. It must be claimed in a return or an amended return within 12 months of the filing date. There are essentially four types of transaction affected by MDR, these are:-
- Only dwellings (except annexes), MDR is fairly straight forward.
- Dwellings and other (non-dwelling or commercial) property. After over a year of discussions, HMRC agreed that their original policy was wrong and updated their guidance in November 2020. The 12 month time limit may be extended for refunds where the pre-November 2020 guidance was relied on.
- Annexes and subsidiary buildings. A dangerous area. Although the principal is simple, as explained in Part 2, these transactions need to be very carefully analysed.
- Building sites. The point at which a building project changes from “bare land or a commercial property” to “a residential site” and then to “a number of dwellings under construction” is not clear in the legislation. More in Part 3.
In case 1 above, SDLT is calculated on the average price per dwelling and then multiplied by the number of dwellings. Effectively benefiting from each dwelling’s nil rate band and lower rates. The legislation originally set a minimum level of SDLT of 1% but since the introduction of the Higher Rate Additional Dwellings (HRAD) the effective minimum rate is 3%.
Where appropriate, the 2% non-resident surcharge (NRS) would apply to dwellings purchased under MDR (taking the minimum rate of SDLT to 5%).
If more than 6 properties are purchased together, instead of claiming MDR buyers can opt for the purchase to be treated as commercial under FA2003 s116(7). If a s116(7) option is made, SDLT is based on commercial rates and neither the 3% HRAD nor 2% NRS apply.
In case of 2 above, the calculation is more complex. Effectively SDLT is calculated on the whole consideration based on residential rates and again on non residential rates. Then a relevant percentage of each calculation is combined to reflect the residential/non-residential split. Since November 2020 HMRC accept that the dwellings element of a mixed MDR purchases is not subject to the 3% HRAD reducing the minimum rate to 1%.
Where MDR is claimed on mixed purchases, the 2% NRS applies to the residential portions but not the non-residential portions.
Case 3 is the area of most concern for the high street conveyancer. This is where a main residence has either an annex or a subsidiary building. Whether MDR can be claimed depends on whether the property as a whole is one dwelling or several dwellings. Then whether the 3% HRAD rate applies depends on the valuation of the annex compared to the overall property. The most difficult issue is determining whether the annex is a separate dwelling in its own right. This will be discussed in more detail in part 2.
Case 4 is the subject of several cases in the tribunals (many being appealed to the higher courts). The aim was to encourage more houses being built by reducing the SDLT burden on builders. However, it appears HMRC are trying to restrict its availability to land transfers where developers are selling projects that are mid-stream, rather than facilitating the developer who buys land and takes the site through to completion. This is discussed in more detail in part 3.
This article was submitted to be published by SDLT Compass as part of their advertising agreement with Today’s Conveyancer. The views expressed in this article are those of the submitter and not those of Today’s Conveyancer.